Guest Post: Nick Kearney on land tax

A guest post from Nick Kearney who is an Auckland property lawyer and holds a Masters degree in law from Auckland University.  He is also a candidate for the Act Party in this year’s election:

After a bit of a kerfuffle, Jacinda Ardern has strongly stated that her government’s land tax will not include “the family home or the land that a family home sits on”.

Voters might rest assured.  Certainly a further tax on mums and dads who own a home to raise their family is difficult to sell.  But we have no detail.  None whatsoever.  And the statement by Ardern about the family home not being taxed seems fine, but there are still problems. 

Last week I looked at a leasehold unit title in Auckland for a client.  The land was owned by Ngati Whatua, and leased for 150 years to the body corporate.  Many of the apartments were Labour’s so-called family homes.  They were ideal first homes for those unable to afford soaring Auckland land prices, as the entry level for leasehold units is much less.  The very nice apartment I saw was only $325,000.  It had two bedrooms, a nice pool and gym complex, tennis court, air conditioning, sauna, spa and security CCTV.  It is modern and spacious.  It is a great first home option for a young family or a young couple starting out.  Indeed, it is exactly the type of first home that those on the left of politics have been championing for a while.

I read the lease.  It contains a provision requiring the lessee (the unit owners) to pay the ground rent, but also any “rates, taxes…paid or payable, or otherwise incurred in respect of the Land…”. 

If Labour’s land tax was in place, it would be levied against Ngati Whatua as the landowner, but under the lease it is charged to the unit owners.  Is Labour going to demand Ngati Whatua not to on-charge the land tax to the unit owners that are family homes?  Or will Labour’s desire not to penalise family homeowners not be realised with leasehold units? 

Many of these units in this complex are investment properties.  Is Labour proposing that only those properties pay the land tax, and not the family units?  If so, how does Ngati Whatua recover all its costs under the tax it is charged as it is entitled to do under the lease?

When I started thinking about this more deeply, I then thought of a good friend’s situation. 

She has a small retail shop on the North Shore held under a commercial lease.  It is her first venture of this type, and it is going really well.  I am proud of what my friend has done.  But as with all start-ups, the first couple of years are tough.  You have to get yourself known.  And to maintain a strict budget your costs must be kept to a minimum.  It’s very tough in fashion retail, with the internet providing stiff competition.  My friend’s lease doesn’t require her to pay the landlord’s land tax, but that’s only because there isn’t currently one.  It does require her to pay all rates, which of course she does.  Naturally any landlord is going to recover a land tax from the tenant, which will undoubtedly add a cost to my friend’s business.  That cost will have to be passed on to her customers – the consumers in our society.

I also act for a very successful retail chain tenant.  They have purchasing power and brand recognition.  Building owners are pleased to have them as tenants.  Because of its name, this client manages to negotiate much more favourable lease terms.  On many occasions, it doesn’t pay a lot of the usual outgoings payable under a commercial lease.  I am certain this client, and other large retail tenants, will negotiate out of paying any land tax under any lease, but the same almost certainly won’t be available to my friend’s very small business.

In 2009, a tax working group put together by John Key’s government assessed the taxable land base at $460 billion.  If the land tax was 1% of this, it would raise $4.6 billion in revenue.  That sounds a lot, and it is to a government keen to spend it.  But if one excludes Labour’s exemptions, it’s possible that only half of that amount is available.  Although a land tax is very efficient, as land cannot be moved, it would also be highly disproportionate because of highly inflated Auckland land values when compared to land values in other parts of the country.  It would hit Aucklanders hard.  Using my examples in this article, the family that owns the unit on the leasehold Ngati Whatua land will pay about $700 per year in land tax, based on that unit’s share of the land value of $7,000,000.00.  Yet, my friend’s small retail shop would face a tax of $4,000.00 per annum, based on an underlying land value of her leased building of $400,000.00.  My friend doesn’t yet earn $4,000.00 per annum.  She’s also the sort of person who votes Labour.

I started off this article by repeating what Jacinda Ardern said last week.  Ardern also said that she wanted the country’s tax system to be “fair”.  For my friend’s sake, and for the sake of the young family in the leasehold apartment, I hope she follows through on this promise.

Nick  offered this op ed to the Herald which decided not to publish it. A pity as I think it makes excellent points, regardless of Nick’s background.